Great Moments in Tax Litigation

Are there really any great moments in tax litigation? You bet! But Hollywood doesn’t particularly glamorize the tax part, although the stories and lessons loom loud and clear. If you’re reading this and your name and story are included, all I can say is “I’ve got quite a blog following, and there’s time travel involved.” So stay with me for this different kind of holiday read!

Tax litigation courtroom drama

Some of the greatest stories in America reach their dramatic finale in a courtroom.

Who doesn’t admire Gregory Peck as Atticus Finch standing up to racism in Jim Crow-era Alabama in To Kill A Mockingbird? Who can forget Tom Cruise baiting Jack Nicholson into bellowing out that yes, he did order the Code Red at the end of A Few Good Men? And who can’t imagine the smile of relief on O.J. Simpson’s face when the jury announced they had found him not guilty? (Although while in prison for armed robbery, the IRS hit him with a tax bill and liens for some $500,000.)

Funny thing about those stirring courtroom dramas, though . . . they never involve tax cases. Don’t novelists see the conflict inherent in a “battle of the appraisers” as they debate golf course valuations in a conservation easement case? Can’t Hollywood producers tease out the complex dramas underlying a typical multinational transfer pricing dispute?

But tax litigation does occasionally sneak into an actual court

This tax litigation tale begins on the banks of the Ohio River back in 1850. Cincinnati was the sixth-largest city in America, nicknamed “Porkopolis” for the area’s meatpacking industry. Today, Cincinnati, along with rivertown rivals like Pittsburgh, St. Louis, and Kansas City, is navigating the transition to a 21st-century economy. But only Cincinnati is the home of professional baseball. And while today’s Cincinnati Reds may be a pale shadow of the 1970s “Big Red Machine,” fans still flock to the riverfront Great American Ballpark on game day — especially when the team gives away player bobblehead dolls.

Those bobbleheads bring us to the Titanic struggle that just reached its ninth inning in Ohio Supreme Court: do the Reds have to pay use tax on the value of those bobbleheads? The state tax commissioner argued the team had bought them to give away to fans, in which case the team owed the tax. The Reds responded that they had bought them to resell as part of the overall ticket, in which case they would qualify for the “sale-for-resale” exemption under ORC §5739.01(E). The Board of Tax Appeals called the Reds “out,” and demanded $80,000 in back tax.

Naturally, the team challenged the ruling on the field. That’s when the replay reviewers at the Court stepped in. Last month (November, 2018), the Court issued their call. By a 5-2 count, the Justices yanked the commissioner from the mound. Instead, as Chief Justice Fisher wrote, “the unique promotional items were an explicit part of the bargain, along with the right to attend the game, that the fans obtained in exchange for paying the ticket fee.” That promise qualified the play as a resale. In the words of longtime radio announcer Marty Brennaman, “This one belongs to the Reds!”

IRS tax litigation and multi-million dollar tales

Lauryn Hill: This tax evader inspired a book that become the binge hit, “Orange Is the New Black.” Hill, the Grammy-winning rapper, was sent to that same federal prison in 2013 after she pled guilty to tax evasion charges for $1.8 million in earnings. She was released a few days early from her three month sentence. Her tax lien morphed into a tax bill of $2.3 million.

A tax lien securesthe government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in. IRS.gov

Al Capone: This story has it all! Murder, bootlegging, extortion! But for all his crimes, it was the IRS nailing Capone for tax evasion that sent him to the federal pen. His $270,000 ($4+ million inflation-adjusted) tax conviction has been attributed to five mistakes:

Capone didn’t have a proactive tax plan and waited too long to get any tax plan;

He spent and lived too lavishly;

He trusted the safety of unregistered offshore bank accounts;

He ticked off people in high places;

He hired the wrong attorneys.

Wesley Snipes: The “very sorry” about it tax case that resulted in a three-year prison sentence is replaced now with his troubles trying to settle his now $23.5 million tax case. It’s not over yet for the actor, and interest is still growing, but not on his career–on the $23.5 million! The IRS doesn’t give up. Did you know that when you’re dealing with the IRS, they are right and you are guilty, until you prove otherwise!

Willie Nelson: Willie cut a double album titled The IRS Tapes: Who’ll Buy My Memories? after blaming Pricewaterhouse Coopers, his accounting firm. Nelson avoided prison time and negotiated a $16.7 million tax bill down to $6 million. Had to auction off his guitar which was ultimately returned to him. He’s still making music and has another accounting firm. We know what to do after you’ve had the wrong CPA!

Leona Helmsley: Rumor has it she operated on the assumption that “We don’t pay taxes. Only the little people pay taxes.” This “Hotel Queen” with a tax bill of $7.1 million spent 21 months of her four-year sentence in a federal prison with less-than-luxurious accommodations. Lessons learned include “when it comes to the IRS, never assume.”

What’s the bottom line with tax litigation?

Every financial choice you make has some tax consequence whether or not you’re consciously making (or not making) a choice. While nobody is getting rich by eliminating bobblehead taxes, the lesson remains that proactive tax planning is the key to paying lessor, as in Capone’s case, not making the #1 mistake that landed him in prison.

So enjoy the rest of 2018 and have a Happy New Year. And count on us to help you make the most of all your planning opportunities in 2019 and beyond!